Court of Appeal provides guidance on application of Australian proportionate liability legislation to arbitration

A recent decision of the South Australian Court of Appeal, Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2022] SASCA 107 (Tesseract), confirmed that the proportionate liability legislation it was required to consider is not available to be applied in an arbitration, unless expressly provided for in some form.

Proportionate liability legislation exists in all Australian jurisdictions. The regimes provided for by the legislation generally apply to ‘apportionable claims’, meaning certain claims for damages. The general effect of the regimes is to make each defendant who is a concurrent wrongdoer liable to a plaintiff only to the extent of their apportioned share of responsibility. The plaintiff is then left to join or separately sue other wrongdoers and bear the risk of any shortfall in recovery.

At the heart of proportionate liability regimes is the power of a judicial body to join multiple responsible parties to a dispute so that liability can be apportioned between them. Absent agreement, no such power to join third parties exists in an arbitration. In Tesseract this difference between court and arbitration supported proportionate liability legislation not being ‘apposite or amenable’ for importation into arbitration proceedings.

What this means for you

This decision is consistent with earlier decisions in Australia, where the issue of whether proportionate liability legislation applied to arbitration had been considered. Tesseract suggests that:

• proportionate liability legislation does not apply to arbitrations by force of its own terms, and unless otherwise agreed arbitrators will award damages in accordance with the common law position, meaning the respondent’s liability will not be reduced to the extent others contributed.
• if parties want a proportionate liability regime to apply in an arbitration, they must expressly agree to this. Other matters such as joinder of possibly liable third parties also need to be considered as part of agreeing any such regime.

Given the broad consistency of legislation across Australia, this decision is relevant to the application of similar legislation in all States and Territories.

Context

Before Tesseract, there were two key decisions suggesting that proportionate liability was not available in an arbitration:

• In Aquagenics Pty Ltd v Break O’Day Council [2010] TASFC 3 (Aquagenics), the majority of the Full Court of the Supreme Court of Tasmania dismissed an appeal, upholding the first instance decision that the proportionate liability provisions were not available in an arbitration.
• In Curtin University of Technology v Woods Bagot Pty Ltd [2012] WASC 449 (Curtin), Beech J held that proportionate liability provisions were not available in an arbitration. His Honour reasoned there was not a legislative intent for the provisions to apply in arbitral proceedings.

As Curtin was not decided by an appellate court, there remained some uncertainty as to whether proportionate liability provisions are available through force of the legislation itself. There also remained an unanswered question as to whether proportionate liability provisions were otherwise implied into arbitration agreements.

These questions were addressed in Tesseract.

The Decision

Context to the application

In Tesseract the South Australian Court of Appeal considered whether an arbitrator was entitled to apply the proportionate liability provisions as set out in Part 3 of the Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) (Law Reform Act) and Part VIA of the Competition and Consumer Act 2010 (Cth) (CCA).

The proceedings were brought after leave was granted in respect of an application for the determination of a single question of law in the course of an arbitration, under s 27J of the Commercial Arbitration Act 2011 (SA) (Commercial Arbitration Act).

The context to that application was that the applicant and respondent had entered into a contract for the applicant to undertake engineering and consultancy services in relation to the design and construction of a warehouse building by the respondent. The respondent alleged that there were deficiencies in the work performed, seeking damages for breach of contract, breach of a duty of care in negligence and for misleading and deceptive conduct under the CCA. Arbitral proceedings were commenced.

The applicant denied liability and contended in the alternative that any award of damages should be reduced for contributory negligence, and further or alternatively to reflect the proportionate liability of a third party concurrent wrongdoer under Part 3 of the Law Reform Act (in respect of allegations of breach of a contractual or tortious duty of care) and Part VIA of the CCA in respect of the allegations of misleading and deceptive conduct.

In a decision published on 21 October 2022, Doyle JA, with Livesey P and Bleby JA agreeing, ultimately held that the proportionate liability regimes provided for in those parts of the Law Reform Act and the CCA were not available to be applied in an arbitration unless expressly provided for by the parties in some form by agreement.

Key issues

The applicant made three arguments as to why the proportionate liability regimes should be available to be applied to the arbitration:

1. Under section 28 of the Commercial Arbitration Act the arbitrator is bound to apply the substantive law of South Australia, which includes proportionate liability;
2. A process of statutory interpretation reveals that proportionate liability legistation applies to arbitration proceedings by its own force; and
3. The arbitration agreement in the parties’ contract contained an implied term to the effect that the arbitrator has authority to grant any relief that would have been available had the claimant sued in a court of appropriate jurisdiction, including proportionate liability.

The Court considered each of those arguments. We briefly discuss below some of the key reasoning of the Court in relation to them.

What is the relevant scope of the Commercial Arbitration Act?

Section 28 of the Commercial Arbitration Act provides relevantly that:

…

(2) Any designation of the law or legal system of a given State or Territory must be construed, unless otherwise expressed, as directly referring to the substantive law of that State or Territory and not to its conflict of laws rules.

This subsection is derived from article 28 of the UNCITRAL Model Law on International Commercial Arbitration. Its interpretation by the Court of Appeal is therefore transferrable to all other Australian states and territories, which contain a similar provision in their equivalent legislation.¹

The Court found that proportionate liability legislation is ‘substantive law’. However, the Court further found that section 28(2) does not operate to require every substantive law within the legal system of a designated State or Territory be applied. Rather, section 28(2) merely raises a separate question as to whether a law applies by the force of its own terms, or whether it applies by force of contractual agreement. These questions are considered below.

Do the proportionate liability provisions apply by their own force?

With reference to earlier authorities including Aquagenics and Curtin, Doyle JA engaged in a process of statutory interpretation, and considered that neither the Law Reform Act nor the CCA evinced an intention on the part of the legislature for the relevant proportionate liability legislation to apply to arbitration.

A key feature of arbitration is that arbitrators are not able to compel culpable third parties to be joined to proceedings. The Court placed significant weight on this inherent feature of arbitration, as the power of joinder is one of the essential components of proportionate liability legislation. The ability for Courts to join third parties was described by Doyle JA as ‘a significant aspect of the balance struck between the parties under the proportionate liability provisions in the Law Reform Act’.

Consequently, the Court found that the proportionate liability provisions did not apply to arbitration proceedings by force of their own terms.

Did the parties otherwise agree that proportionate liability would apply?

In Government Insurance Office of NSW v Atkinson-Leighton Joint Venture (1981) 146 CLR 206 (GIO), 235, Stephen J concluded that ‘Subject to certain exceptions… a claimant should be able to obtain from arbitrators just such rights and remedies as would have been available to him were he to sue in a court of law of appropriate jurisdiction.’

Doyle JA agreed with submissions that arbitration agreements contain an implied term to the effect of Stephen J’s statement in GIO as extracted above.

However, Doyle JA cautioned that there are legislative provisions that ‘are not apposite or amendable to application in arbitration proceedings’. The difficulties in the operation of proportionate liability provisions in arbitration, particularly in relation to joinder of third parties (which may not be possible), significantly disrupted the balance of risk and burden intended in enacting the proportionate liability provisions. His Honour said:

I do not think that it would be appropriate to conclude that the parties intended to confer the Arbitrator with authority to apply these provisions in this changed way; or indeed that the relevant legislatures intended that the regimes they enacted might be ‘picked up’ and applied, in a materially changed way, by an implied term of an arbitration agreement (at [201]).

The parties here had not expressly agreed that the relevant proportionate liability regimes apply. Doyle JA was prepared to accept that it would be possible for some form of proportionate liability regime to apply in the form expressly agreed by parties to arbitration.

Application to other jurisdictions such as NSW

All Australian jurisdictions have proportionate liability legislation.

In NSW, for example, the proportionate liability scheme is contained in Part 4 of the Civil Liability Act 2002 (NSW) (Civil Liability Act). Part 4 of the Civil Liability Act is drafted in very similar terms to Part VIA of the CCA, which was considered alongside the Law Reform Act in Tesseract.

Furthermore, the decision in Teserract largely turned on the inability for arbitrators to join or bind third parties, and how, contrasted with the powers of a Court, this resulted in a significant difference in the operation of the Law Reform Act and the CCA.

This decision is therefore likely to be persuasive in other Australian jurisdictions irrespective of the variances in their statutory proportionate liability regimes. However, any nuances in the regimes and the parties’ express agreement will continue to be relevant to consider.  

Conclusion

The decision provides further, welcome clarity about when proportionate liability regimes may apply to arbitrations.

It is common for parties who have agreed to arbitration to expressly exclude the operation of proportionate liability legislation to the extent permitted (noting that in all jurisdictions except for Queensland contracting out is expressly permitted or at least not expressly prohibited). This decision suggests that if, for whatever reason, parties want a form of proportionate liability to apply, they will need to expressly provide for this.